Funding retirement…

Funding retirement is a real concern for many. Should you drawdown or take income from your capital? Here are Living Money’s views…

In short, I would suggest the simple answer is both – a combination of sources of cash for spending adds diversity and reduces risk. Its also not worth getting too hung up on whether you use capital or income – when you spend it, a dollar is a dollar is a dollar.

Consider a “Keep Warm” strategy, whereby core expenditure (food, energy, cost of living space etc) is covered by a guaranteed income for life – i.e. some sort of pension income that arrives in your bank account month after month irrespective of your health, the economy, the markets, tenants etc. In other words, you have ensured basic security, whilst being able to use other assets with more flexibility to fund the activities and lifestyle you wish to lead in retirement.

Whether you take cash for this from income or capital will depend on a number of factors including how much you need to spend and when, how much you want to leave to others on your death, what risks you are happy to take or avoid – and tax.

The last is significant. For instance, here in the UK the capital gains tax regime is more generous than the income tax regime, so it makes sense to invest for capital growth and fund spending through realised capital gains / losses to take up annual CGT allowances. If you take out more than the growth of the portfolio you also reduce the size of your estate in terms of estate taxes on death. However, you don’t want to get into the situation where your money dies out before you do, so long term cash flow and liquid asset planning is important, as is the adoption of a strategy of controlled depletion of capital.

Finally, remember that cash is king. Putting money into illiquid assets such as property may give good returns, but those returns are the price of risk – including liquidity risk. Particularly as you get older you will be more concerned with liquidity and flexibility than returns.